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Top ETF Trends of the Week

by ETF Base on October 24, 2010

Equities continued their ascent last week, posting a mild gain of .6% for the S&P500 following a spate of favorable earnings announcements with very few disappointments. While most companies have now reported and much of the positive anticipated earnings reporting sentiment may be built into equities valuations already given the trend we’ve seen, there are a few other factors impacting equities at the moment. There is the still unresolved foreclosure scandal, a critically important Quantitative Easing 2 announcement anticipated in early November, and we will certainly see if this was or wasn’t a bond bubble after all when it’s clear just how substantial the program will be and whether the current low yields we saw were already reflective of a major easing program or whether markets are underwhelmed and bonds sell off.

For the week, we saw strength in soft commodities and real estate while we saw weakness in precious metals, with those who timed it right to short gold, realizing quick gains during the correction. Here are the top conventional and leveraged ETFs from last week which may be volatile going into this week as well.

Conventional Long ETFs/ETNs

BAL – iPath Dow Jones-UBS Cotton Subindex Total Return ETN – Up 11% – Cotton prices have risen over 50% in just the prior three months on concerns over weather and the inability of supply to keep up with demand. China and Pakistan have seen heavy flooding and with both being top suppliers in the world, such a spike should not be unexpected. BAL is up 60% on the year, with most of that gain coming from summer onward.

SGG – iPath Dow Jones-UBS Sugar Subindex Total Return ETN – Up 5% – For reasons similar to cotton, but due to flooding in Brazil, sugar has had a strong run as well, often appearing on this list. SGG is up an astounding 83% over the prior 6 months. Keep in mind that ETNs differ from ETFs in that you take on the solvency risk of the issuer, whereas, ETFs hold the underlying shares/assets generally.

FAA – Guggenheim Airline – Up 6% – The airlines have been staging a surprising comeback of late, with the majors Delta (DAL), American (AMR) and US Air (LCC) all turning in strong earnings reports and making rosy projections of a recovery. FAA is up 14% over the prior month.

Leveraged ETFs

ZSL – ProShares UltraShort Silver – Up 8% – Both silver and gold corrected last week, perhaps due to the notion that the excess money supply anticipated from the November QE2 announcement has already been built into the market. ZSL provides the 2X daily inverse return for bulk silver. As you can imagine, it hasn’t been pretty for ZSL given the incredible runup silver has undertaken. In fact, has highlighted in this article on ETFs beating gold, silver has actually been much more volatile (and profitable) than gold bullion itself (GLD), even though gold tends to grab the headlines. As such, being 2X short, ZSL has lost 48% over the prior 6 months and 60% YTD.

GLL – ProShares UltraShort Gold – Up 6% – GLL is the 2x inverse daily return of bullion and is one of many gold ETFs, but similar to ZSL, GLL has performed quite poorly. Aside from the fact that leveraged ETFs don’t make for good long term investments due to daily resets anyway, gold has also been on a tear. Study up on the gold tax laws before investing in various ETFs out there though, since in many cases, it is treated as a “collectible” and taxed at a much higher rate. GLL is down 27% over the prior 6 months and down 37% YTD.

FAS – Direxion Daily Finan. Bull 3X – Up 5% – The financial sector showed some strength last week, seemingly in spite of the foreclosure-gate scandal that threatens put-back options, delayed foreclosures, and I would anticipate, Congressional hearings to determine how fraudulent foreclosures were undertaken, but the week did see favorable announcements from some major components of the index.